What is draft red herring prospectus?

The document clarifies the reason why the company wants to raise money from the public, how the money will be used and risks involved in investing in the company.

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Last Updated: Apr 06, 2020, 12.52 PM IST

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The role of the merchant banker, in this case, is to take care of the legal compliance issues and ensure that prospective investors are aware and kept in the loop of public issue.

A draft red herring prospectus (DRHP), or offer document, is the preliminary registration document prepared by merchant bankers for prospective IPO-making companies in the case of book building issues. The document includes information about the company’s business operations, promoters, financials, its standing in the industry it deals in and listed or unlisted peers.

The document clarifies the reason why the company wants to raise money from the public, how the money will be used and risks involved in investing in the company. It does not contain details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later.

The price cannot be determined until the bidding process is completed. In case of book-built issues, such details are not shown in the red herring prospectus filed with ROC in terms of the provisions of the Companies Act.

The role of the merchant banker, in this case, is to take care of the legal compliance issues and ensure that prospective investors are aware and kept in the loop of public issue.

Sebi reviews the draft document and checks if adequate disclosures are made. It gives its observations to the merchant bankers, who make the required changes and file the final offer document with Sebi, the ROC and stock exchanges.

The final document is reviewed, and observations if made, are to be implemented.